How To Understand what Safety Stock Is

Unless you are employed in inventory management by a manufacturing or a retail business, there's a good chance that you are oblivious to the concept of safety stock.

This article is intended to provide a basic understanding of the term.

The words -- "safety" and "stock" -- that make up the term are appropriate. A simple definition of safety stock is "stock" that provides "safety" against a stock out, which is bad for business. Stock out is a state or instance of being out of goods, according to dictionary.com.

Before offering an enhanced definition to broaden your understanding of safety stock, it’s necessary to introduce another term. Cycle stock is the stock a company has available in a given period, such as a week or a month, to meet its forecast for demand from customers. Working stock is a synonym for cycle stock, which can vary, for example, by season.

Here's an enhanced definition of safety stock -- stock the manufacturer or retailer keeps in addition to cycle stock as a buffer against a stock out. The term "buffer stock" is a synonym for cycle stock.

It’s natural that someone not employed in inventory management by a manufacturer or a retailer would have a simplistic view of a short-term spike in customer demand, that it could only be good for the company. However, the short-term spike actually could be bad if a manufacturer can't make enough products or if a retailer doesn’t have enough products to fill the orders in a timely fashion.

For manufacturing and retail businesses, there always will be a cost associated with keeping inventory -- cycle stock and safety stock. But it is important to understand that safety stock enables the manufacturing or retail business to satisfy excess demand without having to take extraordinary steps, the result of which would be needless, exorbitant expense. For example, it is more cost-effective for a manufacturer to keep safety stock that would keep the production line running compared to the financial hit it would incur if the line had to be shut down due to a stock out.

The manufacturer would incur the costs of purchasing widgets and having them delivered as quickly as possible. Also, workers still might have to be paid even though the production line was idle. This cash sinkhole could have been avoided if safety stock had been present.

For those not employed in inventory management, this article hopefully has fulfilled its purpose -- to provide a basic understanding of safety stock.